The Two Cost Systems

Sacred Heart Hospital (SHH) faces skyrocketing nursing costs, all of which relate to its two biggest nursing service linesthe Emergency Room (ER) and the Operating Room (OR). SHH's current cost system assigns total nursing costs to the ER and OR based on the number of patients serviced by each line. Total hospital annual nursing costs for these two lines are expected to equal $300,000. The table below shows expected patient volume for both lines.

MeasureERORTotal

Number of patients (ER visits or OR surgeries)1,0001,0002,000

Number of vital signs checks2,0004,0006,000

Number of nursing hours10,0005,00015,000

After discussion with several experienced nurses, Jack Bauer (SHH's accountant) decided that assigning nursing costs to the two service lines based on the number of times that nurses must check patients' vital signs might more closely match the underlying use of costly hospital resources. Therefore, for comparative purposes, Jack decided to develop a second cost system that assigns total nursing costs to the ER and OR based on the number of times nurses check patients' vital signs. This system is referred to as the "vital-signs costing system." The earlier table also shows data for vital signs checks for lines.

Using the vital-signs costing system, calculate the hospital-wide rate based on the number of vital signs checks.

$_____ per vital signs check

Calculate the amount of nursing costs that the vital-signs costing system assigns to the ER and to the OR.

The vital-signs cost, assigned to the ER $_____

The vital-signs cost, assigned to the OR $_____

Using the results from Requirement 5, calculate the cost per OR nursing hour under the vital-signs costing system.

$_____ per OR hour

Budgeting and Variance Analysis

In an effort to better plan for and control OR costs, SHH management asked Jack to calculate the flexible budget variance (i.e., flexible budget costs - actual costs) for OR nursing costs, including the price variance and efficiency variance. Given that Jack is interested in comparing the reported costs of both systems, he decided to prepare the requested OR variance analysis for both the current cost system and the vital-signs costing system. In addition, Jack chose to use each cost system's estimate of the cost per OR nursing hour as the standard cost per OR nursing hour. Jack collected the following additional information for use in preparing the flexible budget variance for both systems:

Actual number of surgeries performed = 950

Standard number of nursing hours allowed for each OR surgery = 5

Actual number of OR nursing hours used = 5,000

Actual OR nursing costs = $190,000

Enter a favorable variance as a negative amount, and an unfavorable variance as a positive amount. If there is no variance, enter "0" and select "No variance"

For the OR service line, use the information above and the cost per OR nursing hour under the current cost system to calculate the

a. flexible budget variance. (Hint: Use your answer to Requirement 3 as the standard cost per OR nursing hour for the current cost system.)

$_____ Unfavorable

b. price variance.

$_____ Unfavorable

c. efficiency variance.

$_____ Unfavorable

For the OR service line, use the information above and the cost per OR nursing hour under the vital-signs costing system to calculate the

a. flexible budget variance. (Hint: Use your answer to Requirement 6 as the standard cost per OR nursing hour for the vital signs cost system.)

$_____ No variance

b. price variance.

$_____ Favorable

c. efficiency variance.

$ _____ Unfavorable